Ch.17 Corporation Law Flashcards
Corporation
type of legal entity created by the state
- Existence in law is separate from those who form it, possess shares in it or who are responsible for direction (limited ability)
- Principal use is vehicle by which large amounts of capital may be accumulated
- A person in the eyes of the law with similar rights and responsibilities to that of an individual
Corporate is neither an individual nor a partnership:
Separate legal entity from its owners
Existence at law, but not material existence
Artificially created
Rights and duties delineated by law
Existence can be terminated by state
Important characteristics of corporation:
Corporation is separate and distinct from its shareholders, and acts not through theme but through authorized agents
Properly authorized agent may blind corporation in contract with third parties
Shareholders possess limited liability for debts of corporation, and creditors may look only to assets of corporation to satisfy their claims
Shareholder
person who holds a share interest in a corporation; a part owner
Shareholders elect directors and directors appoint officers
Director
under corporation law, a person elected by the shareholders to manage its affairs
Officer
person elected or appointed by the directors to fill a particular office (president, secretary, etc.)
Control In corporations:
Management delegated by shareholders to elected group of directors
Directors make all decisions for corporation
Subject to limitations in the Articles of Incorporation or shareholders agreement
Shareholders cannot bind the corporation in contract (only officers and directors)
Limited Liability
Shareholders’ losses limited to investment in corporation
Personal assets not subject to creditors
In event of loss, only assets available to creditors are those of the corporation
Transfer of Interests
Freedom of shareholders to transfer shares
- Freely in a public or private company
- Subject to restrictions in Articles of Incorporation or shareholders agreement
Identity of shareholder as well as shareholder’s wealth are unimportant
- Once corporation issues and receives payment for shares, no further contribution can be demanded from shareholder
Corporation has unlimited term of operation:
Perpetual existence
Continues even if shareholders die
May be dissolved by state or be voluntarily closed but not dependent on life or death of shareholder
Corporation free to accumulate large amounts of capital by:
Issuing shares or by issue of bonds and debentures
Corporation governed by statute under which it is incorporated:
Sets out conditions and rules of its operation
Rights and duties of shareholders and directors are statutory (not contractual)
Corporate Name
Corporation’s name is an asset of the business
- Must not be the same as another corporation
- Last word identifies it as a corporation
– Examples: Limited or Ltd., Incorporated or Inc., etc.
– Distinguishes corporation from partnership - Cannot denote connection with the Crown
- Cannot be obscene, too general, or cause confusion with existing names
- Must be clearly indicated on letterhead, business, forms, etc.
Special-Act
corporation created by an Act of Parliament or legislature for a specific purpose
- Corporation has only powers specifically granted to it by the statute
- Incorporation for special purposes
– For publish or quasi-public purposes
– Examples:
Construction of public utility, Crown corporations like Canada Post
Ultra vires
if corporation attempts to perform something outside its powers
General Act
form of incorporation whereby a corporation may be created by filing specific information required by statute
- Incorporation in all provinces requires specific disclosures and recitals in incorporation documents (depending on province):
– Memorandum of Association OR
– Articles of Incorporation
Doctrine of constructive notice
presumption at law that everyone has knowledge of the content of all statutes
- Doctrine of Ultra Vires and constructive notice
- Protect third parties from unusual limitations on powers of directors or on corporation itself
Indoor management rule
party dealing with a corporation may assume that officers have the valid and express authority to bind corporation
The Incorporation Process
Process begins with preparation of application for incorporation:
- Name of proposed corporation
- Address of head office and place of business
- Names of applicants (incorporators)
- Address of the head office and place of business
- Names of applicants (incorporators)
- Object of corporation
- Share capital (restrictions)
- Any restrictions or rights attached to shares
- Any special powers or restrictions to business
Shareholders’ agreement
agreement between shareholders of a private corporation concerning management and/or future reorganization of the corporation such as a buy-out of interests
- Protects minority shareholders
- Sets “ground rules” between investors
- Often created by shareholders to guarantee long-term employment in return for accepting status of minority shareholder
Three types of shareholder agreements:
- Shareholder and corporation
- Shareholder and the other shareholders
- Shareholders who act as directors
Issues arising in shareholders’ agreements:
Minimums of the Act must be abided by various matters, including restrictions on powers of directors, appointment and remuneration of officers, plan and budgets, etc. (see textbook)
Shares
ownership of a fractional equity interest in a corporation
- Used to raise capital for corporation
- Can be fixed value or par-value
- Common or preferred
- All corporations must have some voting common shares
Debentures (Bond)
debt security issues by a corporation that may or may not have specific assets of the corporation pledged as security for payment
Priority rights should corporation default on its debts are determined by Bankruptcy Act and Personal Property Security Acts
Priority rights should corporation default on its debts are determined by Bankruptcy Act and Personal Property Security Acts
The Taxation of Corporations
Separate entity at law and is subject to taxation on its
business activities
Shareholders may be taxed on dividends declared by the corporation
- Tax legislation provides for dividend tax credit
Corporations earnings are its own for taxation purposes
Duties and Responsibilities of Directors
Must have at least one director
Ownership is separate from management
Directors responsible for corporation’s operations
Managers of the day-to-day business
Rights to declare dividends
Balance needs of shareholder protection and freedom to manage in corporate best interests
Relationship between directors and corporations is fiduciary
Fiduciary
relationship of utmost good faith in which a person, in dealing with property, must act in the best interests of the person for whom they act, rather than in their own best interests
Directors
Must disclose his or her interest in particular contract or property
- Refrain from discussing or voting
- Accountable at law for breach of duty
Director must:
Act in good faith at all times
Use care and skill in carrying out duties
Exercise powers and duties honestly with a view to the best interests of the corporation
Exercise powers with the care and skill of a reasonably careful and prudent person in similar circumstances
May profit if disclosure to, and with approval from, the Board.
Director may not:
Engage in transaction with third party that might deprive corporation from opportunity to profit
- Doctrine of corporate opportunity
Be in a conflict of interest
Engage in any activity that might permit the director to profit at the corporation’s expense
Vote on such matters as a director but may vote as a shareholder
Doctrine of corporate opportunity
use of corporation information for a personal benefit to the detriment of the corporation
Directors held personally liable for certain events that occur as a result of their actions
Imposed to encourage directors to comply with law
General rule - liable for any loss by the corporation if the directors commit the act when it is ultra vires
Perform acts contrary to the statutes
- Sell shares at discount or declare a dividend that impairs capital of corporation
- Store industrial waste improperly
- May be liable for unpaid taxes and employee wages
Due diligence
obligation on the directors to ensure that effective systems are in place to comply with the law, and to monitor the systems to ensure compliance
Defence for directors:
Does the action lead to absolute liability
OR
Can a defence of due diligence be raised?
Outside director
director who is not an officer or employee of the corporation
- Paid directors not involved in day to day management of corporation
- Must inform self of corporation’s business
- May rely on expert reports
Director Defence Due Diligence
Directors must exercise the care, diligence, and skill that a reasonably prudent person would do in similar circumstances
Standard of care varies depending on the circumstances
“Business judgement rule”
reluctance of the court to interfere with decisions of the board
- Bad business decisions do not necessarily create director liability
- Limited to cases where directors can show they informed themselves and exercised judgement
- Judicial requirement of good faith and due diligence
Sarbanes-Oxley Act
U.S. statute that imposes extensive duties on corporations to ensure accuracy of financial and securities information provided to the public
Majority rule:
Shareholder meetings decide matters by a majority
Does not protect minority shareholders - only has limited rights when misuse of power by majority
Courts recognize expectations to “majority” rule:
- Act objected to is ultra vires
- Act personally affects rights of minority shareholders
- Corporation fails to comply with procedural rules
- Act constitutes a fraud on minority shareholder
Common Law action against directors by shareholder is difficult because corporation is the body injured
Shareholder must take action for corporation (a derivative action)
Shareholder must satisfy courts that:
- Internal attempts to resolve matter have been exhausted
- Actions or decision of directors were improper, and caused injury to corporation
- Security for costs of action should claim fail
Minority shareholders also protected in Canada Business Corporations Act
Shareholders may seek relief if directors or corporation act in a way that oppressed, unfairly, prejudices, or unfairly disregards their interests
A broad standard protecting reasonable expectations of shareholders
Court nay rectify matter under broad statute powers
Events occur that limit existence of corporation:
Most common is inability of corporation to make a profit
Corporation is solvent and may wind up its business or if insolvent, may be involuntarily dissolved
Corporation ceases to exist when process complete
Procedure dictated by statute
Purchase and Sale of a Corporation
Two methods:
Share sale - buyer buys the shares of corporation
- Take the good with the bad
Asset sale - buyer buys certain assets of the corporation
- Can buy the good and need not purchase the undesired
Issues of sale/purchase
of corporation:
Tax implications for each type of sale
General rule: seller likes to sell shares and buyer likes to buy assets
